The correct answer is Option (3) → (D), (A), (B), (C)
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Increased demand for foreign goods and services leads to a shift in the demand for foreign currency. When Indians travel more and buy more foreign goods/services, they need to convert more Indian Rupees (INR) into foreign currency (like USD, EUR). This directly increases the demand for foreign currency in the foreign exchange market. (D) The demand curve shifts towards the right. (This refers to the demand curve for foreign currency).
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The increase in demand for foreign currency affects the exchange rate. In a flexible exchange rate system, an increased demand for foreign currency, with the supply remaining constant, will cause the price of foreign currency to rise in terms of the domestic currency. This means the domestic currency depreciates (e.g., 1 USD goes from 80 INR to 83 INR). This is typically described as an "increase" in the exchange rate from the perspective of how many domestic currency units are needed for one foreign currency unit. (A) Exchange rate increases. (Meaning the Indian Rupee depreciates).
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Domestic goods become cheaper for foreigners. When the Indian Rupee depreciates (i.e., the exchange rate increases, making foreign currency relatively more expensive), Indian goods and services become comparatively cheaper for foreigners to buy. A foreigner with the same amount of their currency can now buy more Indian goods. (B) Exports from India become more affordable for foreigners.
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Increased exports stimulate domestic income. As Indian exports become more affordable, their demand from foreign countries is likely to increase. An increase in exports is a component of aggregate demand, and this boost in aggregate demand will lead to an increase in India's national income through the multiplier effect, assuming other factors remain constant. (C) India's income increases by keeping other factors constant.
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